Untitled Texas Attorney General Opinion ( 1944 )

Honorable 0. P. Lockhart, Chairman Opinion No. O-6036
Board of Insurance Commiesionere Re: Whether debentures created by
Austin, Texas the authority of indentures or trust
agreements which contain any of the
several provisions for additional
indebtedness, mentioned herein, are
eligible for investment under Art.
4725, Vernon's Annotated Civil Stat-
Dear Sir: utes.
Your letter of May 17, 1944, requesting the opinion of this
department regarding the matters stated therein, is in part, as follows:
"Please see the amendment by the Forty-eight Legislature to
Article 4725 as follows:
" . . . I find that the greater portion of indentures or trust
agreement authorizing issuance of debentures for sale to the investing
public contain provisions to the effect that if liens are subsequently
created againat the properties covered by the debentures, the latter shall
become equally and ratably secured with the subsequent obligations and
that the terms of the indentures may be amended with the consent of more
than two-thirds in value of outstanding debentures. Attached you will
please see copied excerpts from statements Included in Moody's report
on industrial securities, which may be accepted for the purpose of thi6
inquiry as an accurate statement of the terms of the indentures.
"Will you please advise me whether debentures created by au-
thority of indentures or trust agreements which contain any of the sev-
eral provisions for additional indebtedness as set out on the enclosed
copied excerpts are eligible for investment under Article 4725 as amended."
Art. 4725, Vernon's Annotated Civil Statutes, provides:
"A life insurance company organized under the laws of this State
may invest in or loan upon the following securities, and none others, viz:
"1. It may invest any of its funds and accumulations in the
bonds of the United States or of any state, county, or city of the United
States; or in any bonds, or interest-bearing warrants issued by authority
of law by any county, city, town, school district or other municipality
or sub-division or by any educational institution of the State of Texas
which is now or hereafter may be constituted or organized under the laws
..
Hon. 0. P. Lockhart, page 2 (o-6036)
of this state, and is authorized to issue ruch bonds and warrants under
the Constitution and laws of this state, provided legal provision has been
made by a tax to meet raid obligations, or in the bonds and warrants of
any educational institution of the State of Texas, or any municipally
owned water system or aewer nyrtem when speclal.revenues to meet the prin-
cipal and interest payments as they accrue upon such obligationr Ehall
have been appropriated, pledged or otherwise provided by ouch municipality
or educational institution; or in any paving certificatee iesued by any
city in the State of Texae and secured by a firet lien on real eatate;
or in bonds issued under and by virtue of the Federal Farm Loan Act ap-
proved July 17, 1916, when such bonds are issued against and eecured by
promiseory notea or obligationa, the payment of which ie secured by mort-
gage, deed of trust or other valid lien upon unencumbered real eetate
situated in this state3 or in first mortgage bonds on real or personal
property of any solvent corporation, and which hae not at any time within
a period of five (5) years defaulted in the payment of any of its debta;
or, in the debenturee of any such corporation with a capital stock of not
lesl than Five Million ($5,000,000.00) Dollare where no lien eXiEtE, or
under the provisions of the indenture providing for the iseuance of such
debenturee, can be created against the real or personal property owned
by such corporation at the time the debentures were issued; but in no event
shall the amount of such investment in the bonds or debentures of any
one such corporation exceed (5%) per cent of the admitted assets of the
insurance company making the investment; or in interest-bearing notes or
bonda of the CniverEity of TexaE issued under and by virtue of Chapter
40, Actr of the 43rd Legislature, Second Called Seseion.
“2. It may loan any of its funds and accumulationa, taking
aE security therefor ouch collateral as under the previous subdivision
it may invest in. It may also make loans upon firrrt lienr upon real es-
tate, the title to which in valid and the value of which is forty (40$)
per cent more than the amount loaned thereon, or upon first liens upon
learhold ertates in real property and improvements, eltuated thereon,
the title to which IE valid, and the leasehold has not less than thirty
(30) years to run before expiration; provided that the duration of any
loan upon such leasehold estateE shall not exceed a period of ten (10)
yearn; or upon sny obligations secured collaterally by any such first liens.
If any part of the value of such real estate is in buildinge, such buildings
shall be ineured against loae by fire for at 1eaEt fifty (56) per cent
of the value thereof with loos clause payable to such company. It may
aleo make losne upon the Eecurity of or purchalre of its own policier.
No loan on any policy ehall exceed the reserve value thereof. No inveat-
ment or loan, except policy loane, ahall be made by any such ineurance
company, unless the same shall first have been authorized by the Board
of Directors or by a committee charged with the duty of supervising such
investmenta or loans. Bo such company shall subscribe to, or participate
in, any underwriting of the purchane or aale of securities or property,
or enter into any such transaction for such purpose, or Eel1 on account
of much company jointly with any other person, firm or corporation; nor
Eon. 0. P. Lockhart, page 3 (0-6036)
shall any such company enter into any agreement to withhold from sale
any of it@ property, but the dirporition of itr property rhall be at all
timer within the control of itr Board of Dlrectorri provided that the
provlrionr of this rub-division as to the value of the real ertate cow
pared to the amount loaned thereon and as to the duration of ouch loan
shall not apply to loam secured by real estate which are insured under
the provlrlona of Title II of the “IVational Housing Act”, enacted by the
Congreos of the United States and approved by the President June 27, 1934.
“-
3. Any life insurance company of the state, for the purpose
of investing its capital and surplus or any part thereof, over and above
the amount of its reserves, may purchase and held as collateral security,
or otherwise, and sell and convey the capital stock, bonds, bills of ex-
change or other commercial notes or bills and securities of any solvent
dividend paying corporation which has not defaulted in the payment of
any of its obligations for a period of five (5) years, the current market
value of which such stock, bonds, bills of exchange or o?her commercial
notes or bills and securities shall be at all times during the continu-
ance of such loan at least fifty (50%) per cent more than the sum loaned
thereon; provided that no such company shall loan or invest in its own
stock, nor more than five (5%) per cent of the amount of its capital and
surplus in the stock of any corporation, and provided further that no
such company shall invest any of its funds in any stock on account of
which the holders or owners thereof may in any eve.nt, be CT become liable
to any assessment except for taxes, nor in the stock of any oily company
or manufacturing company unless such corporation has capital stock of not
less than Five Million ($5,000,000.00) Dollars and unless such corporation
has paid dividends for a period of five (5) years and has not defaulted
in the payment of any of its debts for a period cf five (51 years.
'That in any case in which a life insurance company organized
under the laws of this state, shall reinsure the business and take over
the assets of another life insurance company, either domestic or foreign,
all investments of such re-insured company that were authorized, when
made, by the laws of the state in which it was organized, as proper se-
curities for investment of the funds of a life insurance compsny, and which
are taken over by such re-insuring company, shall be considered as valid
securities of such re-insurl.ng company under the laws of this state, pro-
vided such investments are approved by the Board of Insurance Commissioners
of this state, and same are taken over on terms satisfactory to said Board;
and upon the condition that the Board of Insurance Commissioners shall
have the power to require the re-insuring company to dispose of such in-
vestments upon such notice as it may deem reasonable."
Hon. Lewis T. Carpenter, Vice President and General Counsel
of Southland Life Insurance Company, Dallas, Texas, and Hon. Chas. Franc is,
of the law firm of Vinson, Elkins, Weems & Francis, of Houstcn, Texas,
have presented briefs regarding the matters under consideration which
have materially aided us in passing upon the questions presented. We
thank these gentlemen for these briefs.
Eon. 0. P. Lockhart, page 4 (o-6036)
Art. 4725, supra, was amended by the 48th Legislature, Regular
Session, 1943, p. 192, Chapter 11, and it la apparent that it was the
intent of the Legislature to enlarge the investment field of life insur-
ance companies to include debentures of large corporations. We believe
that the netting of a $5,000,000.00 capitalbzation leads to the conclu-
sion that the Legislature desired to place its EtaZUp of approval on de-
benturea of large corporations in control of large amount of assets re-
quiring $5,000,000.00 in capital stock.
Referring to the term "debentures", it is stated In Corpus Juris
Secundum, Vol. 25, page 1301:
"It has been said that there is not any precise legal defini-
tion of the term, and it is not in either law or commerce a'strictly techni-
cal term, or what is called a term of art. It has, however, been used by
lawyera frequently with reference to instruments under certain statutes;
and a debenture, although never legally defined, is included under one
or three descriptions; firat, as a simple acknowledgment under seal of
the debt, Second, an instrument acknowledging the debt and charging the
property of the company with repayment. Third, an instrument acknowledg-
ing the debt, charging the property of the company with repayment and fur-
ther restricting the company from giving any prior charge. Having in
mind this claseification, the term may be said to signify a debt; an ac-
knowledgment of a debt, in the nature of a bond or bill, etc.; a promise
to pay a fixed EWI of money; a security or promise to pay, for a loan of
money 166ued by a public company, usually creating a charge on the whole
or a pert of the compeny’e stock and property, althcugh not necessarily
in the form of e mortgagei an agreement by which 8 right in equity to a
charge or security on personal chattels as conferred; an instrument, gen-
erally under real, for the repayment of money lent, usually, if not ex-
clunively, used for obligation6 of corporations or large monied co-part-
nerehlps, issued in e form convenient to be bought and sold as investments;
an instrument importing an obligation or covenant to pay, in most cases
aa the present day accompanied by some charge or security, although es
has been raid, the word doeE not neceseerily imply a secured debt or claim,
but, from the context, it may be construed as doing ao, the nature of
the obligation following the terms of agreement or plan under which it was
iseued; an instrument in the nature of a mortgage to secure a certain sum
of money, with interest, to which coupons are attached, making the interest
payable, the term debenture including the entire instrument of obligation,
consisting in the body wherein is set forth the obligation as to repay-
ment of the principal sum, together with coupons attached thereto. . ."
In the case of Lorimer vs. McGreevy, 84 S.W.2d 667, (Kansas
City Court of Appeals, MO.) quoting from the work entitled “Green Brice’s
Ultra Vires” (2d Am. Ed.) page 230, it is said that:
“Debentures may be defined as instruments under seal, creat.ing
a charge according to their wording upon the assets specified therein
Hon. 0. P. Lockhart, page 5 (0-6036)
of the corporation, and, to that extent, conferring upon the grantees
e priority over other subsequent creditors or existing creditors not pos-
reared of ouch a charge. Under this term, houever, are often included
two other varietler of lnmtrumentr which do not anewer thie definition
strictly. There em consequently three varieties of debenturer: 1.
Instruments which do not confer a charge, and which are nothing more nor
less than ordinary bonds end ought to be so styled. II. Debentures in
the true and proper sense. III. In&rums&o which contain more than a
mere charge, which are mortgages in fact, and which, from possession in
addition thereto, the characteristics of debenturea, may be for convenience,
and often are celled mortgage debentures."
In the ceae of Masonic Temple Corporation vs. Harris, 242 Ill.
App. 296, it ie said:
“A debenture is a debt; an acknowledgment of a debt, In nature
of a bond or bill; a writing acknowledging a debt; a document which either
creates e debt or acknowledges it; an instrument which shows that party
owes and is bound to pay; an instrument generally under seal, for the
repayment of money lent; the word being usually used of obligations of
corporations or large monied copartnerships, issued in form convenient
to be bought and sold as investment; an investment importing an obligation
or covenant to pay, in most cases now accompanied by some charge or security;
an agreement by which a right in equity to charge or secure on personal
chattels conferred; an instrument In nature of mortgage to secure a certain
sum of money, with interest, to which coupons are attached... 0 they may
be simple acknowledgments or promises to pay, like promissory notes; they
differ from a mortgage in not conferring legal title or any ordinary right
of ownership, and are at most only equitable mortgages, conferring only
equitable rights; . . ."
The foregoing definitions and statements regarding the term
"debentures" are stated merely for the purpose of showing how such term
is ordinarily used and understood. Ye must assume that the Legislature
used the term "debentures" in Art. 4725 as that term is ordinarily used
and understood.
The term "debentures" as used in Art. 4725, supra, means, we
believe, an obligation which is not secured by a first mortgage on the
real or personal property of the corporation of the kind described in
said statute. Apparently, the Legislature intended to permit the purchase
of such unsecured debentures where: no lien exists; or where none "can
be created against the real or personal property owned by such corpora-
tion at the time the debentures were issued." It is apparent that at
the time of the execution of the indentures or trust agreements for said
debentures, it must be presumed that there is no lien or other secured
debt owed by the corporation. Thus with the issuance of the debentures,
all property of the corporation, both real and personal, becomes subject
to the payment of the debts created by such debentures. As long as no
Hon. 0. P. Lockhart, page 6 (0-6036)
lien exists, or, as provided by said statute, nons can be created against
the real or pareonal property owned by such corporation at the time the
debentures were isrued, there would be no question whatsoever but that
such investments am perfectly valid and legal under Art,. 4725, rupra.
However, when a lien is created rubrequent to the issuance of the debenturea,
then the status of these debenturea becomes Important to the Board of
Inrurance Commissioner1 as to the legality of neme an invertmenta and
the security offered thereby. We believe that no greater protection could
be afforded to the holders of these debentures than a specific provision
contained in the debenture8 or trust agreements creating Bald debenturea
inhibiting the creation of any further lien without these debentures equally
and ratably becoming secured. If under an indenture, a corporation can
subsequently issue bonds and give security for those bonds without ratably
securing the outstanding debentures, then Such types of debentures are
not eligible for purchase. If, however, outstanding debentures con be
made into first mortgage bonds, by reservations contained in the indenture
or trust agreements creating debentures, such type of debentures are eli-
gible for purchase because they conform to the requirement of the act
because no lien exists when the debentures are issued and hence the owner
hae the protection of unmortgaged assets. When under the reservations
of the indenture, or trust agreement, a lien is given which ratably se-
cures such debentures, they become first mortgage bonds and hence are
eligible under the statute as it read prior to the 1943 amendment. The
reservations in the indentures, or trust agreements, do not permit a cor-
poration to deprive the debenture holder of his rights against corporate
property as it existed at the time the debentures were issued. The cor-
poration can strengthen such rights by giving a specific and ratable lien.
When this is done, the unsecured debentures become first mortgage bonds,
and in either event, are eligible for investment by life insurance com-
panies.
We do not deem it necessary to quote the excerpts accompanying
your request as we believe that the following statement is sufficient to
anewer your request. In other words, if the debentures mentioned meet
the requirements hereinafter stated, then they are eligible for invest-
ment, if they do not meet the requirements, they are not eligible for
inveetment under Art. 4725, supra.
It is our opinion that debentures created by authority of in-
dentures or trust agreements are eligible for investment under Art. 4725,
supra, where no lien exists or where none can be created against the real
or personal property owned by such corporation at the time the debentures
were issued and when the lien is created subsequently to the issuance of
the debentures, such debentures are eligible for investment under said
Statute when they are equally and ratably secured. In other words, Such
debentures are eligible for an investment under Art. 4725, a8 above stated,
where no lien exists, or where none can be created against the real or
personal property owned by such corporation at the time the debentures
were issued, or when a lien is created subsequently to the issuance of
Hon. 0. P. Lockhart, page 7 (o-6036)
such debentures, if such debentures are equally and ratably secured,
then they also are eligible for investment.
Very truly yourr
ATPORNEXGENFULOFTEXAS
By /s/ Ardell Williams
Ardell Williams
ABSiBtant
AU:rt:lm
APPROVED
JUN 27, 1944
/B/ Geo. P. Blackburn
(ACTING) ATTORNEYGFXWAL OFTEXAS
APPROVED
OPINION
COMMITmE
BY Is/ AIM
. CHAIRMAN